Why Digital Consumer Companies Are A Poor Indicator Of The Future of Music Tech Investment
Last week Mark Mulligan shared his take on why Twitter was a stock worth watching to suggest the fate of public music offerings and to affect the perspectives of potential music tech startup investors. His argument is tempting but I honestly don't see non-music consumer stocks as good indicators and even if Twitter does well, I don't see that affecting music investors. Unfortunately the issue of music licensing seems to overwhelm even rational minds and the current uproar over lyrics licensing will not help. Note that both our arguments hinge on psychology which is, to me, the most interesting aspect of what investors will do.
"Why the Music Industry Should be Watching Twitter’s Stock Price"
Mark Mulligan makes a compelling argument for Twitter as a stock to watch based on the idea that if it does well other consumer-facing companies going public may also do well.
If a Spotify or Deezer then goes public and the stock doesn't collapse, that indicates there is potential for more wealth-creating exits for investors in music tech companies.
If music tech investors know that such an exit is possible, then they will be much more likely to invest at earlier stages and help other companies make it through.
Assuming I'm reading it correctly, Mulligan's argument is based, in part, on the fact that investors and analysts often follow the overall trajectory of specific sectors of the market, in this case consumer-facing digital services, to evaluate specific stocks. If the whole sector is doing well and conditions suggest that would continue, then new competitive companies are more likely to be perceived as good investments.
In fact, many are making the argument that "Twitter's IPO could pave the way for other consumer Internet companies" without mentioning music tech companies.
Though Mulligan focused on public companies, he notes in passing that other successful exits would also work for companies like Spotify or Deezer, such as a pricey acquisition that enriches investors. But current valuation levels make that an increasingly difficult play.
I personally think we're heading towards a wave of mergers and acquisitions in the music streaming space, which may not be a pretty sight, cause there are just too many companies out there and some of them could ultimately be acquired for far less than their valuation.
However Mulligan is much more educated about streaming music services and has more of an insider view as a consultant on what the companies and many investors are thinking than do I. So if he's not saying much about M&A, he may not yet be seeing the signs. But that's my guess.
Regarding the larger issue of how Twitter's progress could affect music tech investor psychology, I have a different take based on how I'm seeing music tech companies discussed in tech media and what I'm starting to hear from music tech startups about their encounters with potential investors.
The Heavy Weight of Music Licensing
Mark Mulligan addresses the issue to which I allude:
"Right now digital music is not a great investment proposition for professional investors, especially VCs. They see sizeable chunks of their investment disappearing straight onto the bottom line of record labels in the form of advances and guaranteed payments; a congested market that still remains predominately niche in reach; and the CD still lingering as the world’s largest music sales revenue source."
Mulligan believes a couple of high profile exits could turn that perception around.
That may be true cause the future is hard to predict but I believe that the difficulty and expense of music licensing, in particular, is a psychological impediment that makes it difficult for many investors without real domain knowledge to recognize what is in front of them.
For the last couple of years I've noticed that when tech writers refer to music tech companies, they are often using that to mean only music streaming companies like Spotify and Pandora. Sometimes that's just sloppiness but I've seen enough examples to know that many tech writers who aren't focused on music tech really do think that streaming music is the only form of music tech startup and therefore music licensing is required for all music tech startups.
When discussing this topic in comments sections with people whose identity is open and who seem to otherwise know what they're talking about, I find that some investors or investment-watchers have trouble understanding what I'm saying when I say music tech is bigger than music streaming.
One guy who seemed otherwise quite bright just didn't believe me. When I posted a long list of music tech companies that don't need music licensing he had nothing more to say. I guess I won the argument but I would have preferred a better discussion and a more positive resolution.
I'm also starting to ask music tech founders about their experiences with investors regarding the issue of licensing music. I haven't gotten far but I quickly came up with an example.
One founder I spoke with said that even in the first weeks of his accelerator program he was meeting people who couldn't understand that his music events app didn't require licensing. At least one listened to him but either did not believe him or simply could not comprehend what he was saying.
I'm not sure how widespread such views actually are but I'm going to continue gathering evidence for a later discussion.
However, given that this individual who couldn't grasp the concept was considered a serious player, I think we have to recognize that confusion about the music tech space and the assumption that music licensing is always in the picture is a huge barrier to potential investment.
What's happened is that many investors have simply written off music tech, due to licensing issues, and will not consider the sector at all. The psychological blocks seem so large for some that they can't even recognize when the evidence is right in front of them.
And, given the downward trajectory of SFXE, one doesn't have to search far for examples of public music companies not requiring licensing who aren't looking so good at the moment.
I know both Mark Mulligan and I will be pursuing this topic from our own perspectives. Hopefully such efforts will contribute to a richer picture of music tech investor psychology that, coupled with a bit more time, will be quite revealing.
Disclosure: I currently have no investments in startups or public companies. If I eventually have the cash to make some I'm much more interested in buying land with water rights.
[Thumbnail image courtesy Walter Rodriguez.]
- SFX Stock Continues Downward Tumble
- Licensing Difficulties Help Keep Netflix Out Of Streaming Music
- BMI Files Lawsuit To Block Pandora "Stunt"
Hypebot Senior Contributor Clyde Smith (@fluxresearch/@crowdfundingm) also blogs at Flux Research and Crowdfunding For Musicians. To suggest topics for Hypebot, contact: clyde(at)fluxresearch(dot)com.